Magazine

No Return To Cheap Oil

February 22, 2004

OPEC's announcement on Feb. 11 that it would cut its production ceilings by 1 million barrels per day starting on Apr. 1 was yet another sign that Americans may have to live with higher oil prices for the foreseeable future. OPEC, led by Saudi Oil Minister Ali Al-Naimi, has become quite skillful at managing prices, and the Saudis are comfortable with current prices in the $30-a-barrel range.

Not long ago, the Saudis got jittery when prices rose above $30. But now the Saudis and other OPEC members, who are paid in dollars, want to offset the impact of the greenback's sharp decline on their purchasing power. OPEC's announcement can be seen as payback for last weekend's Group of Seven summit, when the U.S. signaled it would do nothing to arrest the dollar's decline. Also, Saudi-U.S. relations are not what they used to be. Crown Prince Abdullah, who is in effect running the kingdom, is far less interested in pleasing Washington than was the ailing King Fahd. Moreover, the Bush Administration has been a huge disappointment for the Saudis, who resent the hostility of White House neocons toward the kingdom as well as their pro-Israel stance.

Of course, the Saudis would be unhappy if they forced up prices too much and choked off economic growth in the U.S., one of their main customers. But the high prices of the last year don't seem to have hurt the U.S. economy or that of China, the other big customer paying for oil with dollars. Thanks to the euro's appreciation, prices for oil has actually fallen in Europe in local currency terms. From Riyadh's perspective, there is little reason not to keep prices high.